Question by Spartan316: Any finance genius’s please check my answers, short selling, selling on margin. 10 pts?
Sam has 00 to invest in Home Depot stock, which now trades for /share. Sam buys 300 shares by taking out a 00 margin loan at an 8% interest rate. Assume HD pays a /share dividend over the next six months. If he sells the stock for /share after 6 months, his rate of return is:

(9300 – 2700 – 5000) / 5000 = 32%

Genentech stock now trades for /share. Wanda short sells 600 shares, putting up the required amount of cash as initial margin. Assume no dividends. If the broker has a maintenance margin requirement of 35%, will Wanda get a margin call if the stock price goes to ? Explain.

25*600 = 15000 + 50% = 22500 cash in account
30*600 = 18000 stock worth
equity = 22500 – 18000 = 4500
4500/18000 = 25%
lower than 35% so yes margin call

If you short sell 200 shares of IBM stock at 0/share, and IBM pays a .50 per share dividend over the next 3 months, your profit or loss if you buy the stock back for /share after 3 months is

(200*100) – (200*.5) – (200*85) = 00 profit

Sam has ,000 to invest, and is choosing between (1) investing in 30 different individual stocks, with brokerage commissions of per trade, and (2) a no-load stock mutual fund that charges a 0.4% expense ratio. If Sam plans to cash in all of her investments in 4 years, with no trading until then, and the market is stable over the 4 years, then what is the cost of each alternative?

30*5 = 150 * 2 = 300 broker commissions
50000*.004 = 200 * 4 = 800 mutual fund

Best answer:

Answer by Archer2000
Your HD equation is a little simplistic since you did not account for repayment of interest on the money that you borrowed.

Second part seems convoluted but the math works out.
It would be simpler to have said
50% – 35% = 15% max loss before margin call.
(30-25)/25 = 20% (larger than 15% so margin call occurs.)

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